1) A startup needs significant capital upfront that exceeds its initial negative cash flow before reaching profitability. Private equity funding can help cover this financing need over several stages. 2) The venture capital process is rigorous and driven by the venture capitalist's needs and expectations. A startup must understand this process and prepare thoroughly to attract private equity investors. 3) Private equity firms seek to invest selectively in growth companies and manage their portfolio to harvest profits through exit events like IPOs or acquisitions. They are motivated by management fees, carried interest in portfolio profits, and delivering returns to their own investors.

1. How to become attractive to a PE firm?
Presentation
13th March 2010
Neelesh, Hundekari

2. Agenda
 Need for PE funding & the funding process
 Different perspectives
 Critical success factors
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3. The business model of each new venture shows a
significant upfront need of capital
Cumulative Net
35
Cash Flow
25
Initial Cash Positive Cash Flow
Deposit of founders Net Cash Flow
15 Operative
Break-Even
5
-5
-15
Negative Cash Flow Total
-25
Financing Need
-35
-45
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1. Year 2. Year 3. Year 4. Year
Example. Typical Cash Flow Curve of a Start-up
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4. Over the time a start-up goes through several stages of
financing to satisfy its capital needs
The Stages of financing of start ups
Early Development/ Exit / IPO Expansion
financing Expansion financing and buyouts
Fuelling the
Bringing a Funding
expansion Creating
concept mature
of the liquidity
to reality growth
business
Seed Second stage Initial Public Investments in the
Offering business or new
Start-up Mezzanine/third businesses
stage Private sale of
interest
First stage Bridge solution/ Acquisitions
restructuring Sales/merger
providing cash, Buyouts
liquid stocks or
better liquidity Turn-around
potential
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5. The new venture can tap into a range of different financing
options – however, venture capital is the most important one
Bringing a concept to reality Development financing Closing the gap
First Second Bridge
Mezzanine/
stage stage solution/
Seed Start up Third stage
(1st VC (2nd VC Restructur
(3rd VC round)
round) round) ing
Sales/
Friends & Family
Substance
Business Angels
Incubators
Venture Capitalist
Industry Partner
Banks (Debt Financing)
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6. One can become attractive to a PE only if one understands
what is the VCs perspective and what can one do about it
Deep and detailed
understanding of the
application process
Efficient
Mutual
and
dependence successful
fundraising
Careful and thorough
preparation for the needs
and expectations of the VC
A start up should get to know VCs and the funding process well
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7. The Venture Capital Process is a rigorous process
– often driven by the venture capitalist
The Venture Capital Process
Adapt Specify
Present Supply
Prepare BP and service Nego-
Start-up VC Round initiate
BP & infor-
require- tiation
Perspective Company mation
Contact ment
Executive Business Business Infor-
Summary Plan Model mation
NDA Term-Sheet Contract
Venture Conver- Nego- Manage-
Exit
sation, Due tiation ment of
Capitalist Screening Valuation divest-
Interview diligence con- invest-
ment
Perspective Visits tracting ment
Completion
Date
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8. A VC‘s business is to wisely invest the investor‘s money
and to benefit from management fees and carried interest
The VC Motivation
Investors
 Idenfity and invest
selectively in growth
companies in certain
Investments$$ $$ Profits industries which
promise a high multiple
Management  Manage and control the
fee Harvesting the investments
portfolio companies in
$$ $$ • Stock market order to grow
Management- VC- • Industry Player investment
Company funds • Financial
$$ $$
Investor  Receive management
fee to cover day-to-day
Carried Equity supply operational cost
Interest  Harvest the investment
$$ $$ $$ by exiting either
through IPO or trade
Selection, sale
Consulting Portfolio  Direct investment and
Companies capital gains back to
Controlling, investors
Realising
 Keep part of the capital
gains (carried interest)
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9. In the whole process, there are some inherent conflicts
between the entrepreneurs and the investor.
The Start-up Perspective The Venture Capitalist Perspective
 Keep as many shares as  Adequate share on stocks
possible
 Certain influence on major
 No second decision maker decision
 Total freedom in terms of  If feasible no further capital
future capital increases extensions
 Highest possible evaluation of Conflict  Realistic or fair evaluation of
the start-up the company value
 As much time as possible for  Concrete and strict timeline
return of investment for the payback
 Realise a personnel business  Generate return of
idea investment
The conflicts cannot be solved but only be weakened !
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10. The start-up should follow a structured process to enhance
their chances of attracting investment
Start-up perspective
Specify
Prepare Adapt BP and Present Supply
service Negotiation
VC Round initiate Contact BP & Company information
requirement
Work out Talk to Develop a
Prepare the Contact
requirements existing detailed
material generation
and needs investors action plan
 Avoid  Has to define  Ask existing  Structure your  Contacts to
unprofessional what kind of investors for venture capital Venture Capitalist
appearance and VC it requires. additional capital approach can be generated
interruptions  Must evaluate first  Dedicate a person in multiple ways.
 The preparation of und explore  Include existing to drive the VC  Competition
the necessary potential investors in the process intensity with
materials is investors as capital raising  Develop a other start-ups
essential well process structured  Support for the
 Executive  Industry  Leverage the old approach to first Steps
summary expertise investors contact the VCs  Establish
 Business Plan  Reputation
network and  Test the sales pitch personnel contact
and reputation and involve the
 Presentation  Speed of process
references  Clarify any open whole team
 Business model
 Commitment
equity or share  Define fall-back
 Personnel agreements options if the VC
 Financial prior to VC
Resumes... process does not
backbone… round work A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 10

11. Likewise the VC tries to pick the winners from the losers
who will maximise their returns
VC perspective
Manage-
Due Nego-
Screening Interview Valuation ment of Exit
diligence tiation
investment
 Screening of  Generates a  Prior to  An in-depth  VC enters  Main issues  The
documents is first personal defining a due into detailed  Active existence of
the 1st step in contact with term sheet a diligence is negotiations. participation possible exit
an evaluation the start-up company carried out  Only 2% of in the options is a
team valuation is  supervisory key decision
 Only 25% of Assessment the board
the applicants  Main issues prepared as applicants criteria
 Market Constant
get through a basis for sign the deal
 already
 Get to know  Management coaching
discussion before an
 Main issues the people Team  Main issues
 Main issues  Leverage of investment
 Management  Business  Competition  Interest rate VC‘s contact is made.
team– model  Consistency in debt network
 Product  Possibility
background,  Clarifying and Integrity
offering  Number, type,  Leverge of
experience, expectation of Biz Plan  Trade Sale to
and mix of synergies
motivation…  Implementati Industry
 Figure out  Risk and stock and between
on Investor
 Business idea mismatches time span of debts portfolio
and investment  Financial companies  IPO
 Market  Clarifying
commitment  Cash  Legal of the same
attractiveness expectations  Divestment
VC
for additional to other VC
 General fit to
services…
VC-Company  Management
Buy-out
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12. Agenda
 Need for PE funding & the funding process
 Different perspectives
 Critical success factors
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13. There are several critical success factors which go into a
successful deal
Critical Success Factors Key questions for a VC
People  Is the industry attractive?
Technology competences  Does the target have a robust
presence in an attractive
Market opportunity industry?
Continuous and promising cash-flow  Are the forecasts sensible?
Manageable need for capital  Can the numbers be trusted?
Benchmarks  Are there any legal skeletons?
Exit possibility  Will we be able to influence
performance?
Location protection
 Are there exit options to realize
the value?
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14. Key questions for a VC(1/4)
Key questions for a VC Sub issues
 Market size
 Is the industry attractive?
 Growth potential
 Industry structure
 Competitive Intensity
 Cost structures and profit potential
 Competitive landscape
 Does the target have a robust
presence in an attractive  Market share
industry?
 Strategy and business model
 Differentiating capabilities
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15. Key questions for a VC(2/4)
Key questions for a VC Sub issues
 Current financial performance relative to
 Are the forecasts sensible?
benchmarks
 Operating metrics relative to benchmarks
 Robustness of the assumptions made in the
business plan
 Accepted standards of propriety
 Can the numbers be trusted?
 No surprises
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16. Key questions for a VC(3/4)
Key questions for a VC Sub issues
 Have all legal procedures been followed (e.g.
 Are there any legal skeletons?
Last capital increase)?
 Are there any hidden legal obligations ?
 Will we(VC) be able to influence  Start-up’s openness to offer a board seat
performance?
 Willingness to look at a VC for management
advice
 Management expertise that the VC can bring
to bear
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17. Key questions for a VC(4/4)
Key questions for a VC Sub issues(Options)
 Trade Sale to Industry Investor
 Are there exit options to realize
the value?
 IPO (mainly at new market)
 Divestment to other VC
(in subsequential VC round)
 Management Buy-out
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